Why a veteran outperformer sees a crash on the cards

Ian Rushbrook has been so bearish on global equity markets for so long he has earned himself the nickname “perma-bear”. Despite the market recovery since mid-June, he is more convinced than ever that financial markets are overvalued and ripe for a correction.

Mr Rushbrook, a former deputy chairman of Ivory & Sime, now part of F&C Asset Management, has been managing the £195m ($370m, €289m) Personal Assets Trust since July 1990.

Speaking in the trust’s offices just off Edinburgh’s Charlotte Square he says: “The amount of risk in the market today is enormous and if something significant goes wrong, you’re going to see something horrific happen.”

His primary concern is that consumer, corporate and government borrowing is out-of-control and has become a prerequisite for economic growth, particularly in the US and UK. As a result, asset prices and gross domestic product figures have been artificially inflated.

“What we’re saying in essence is that there has been no real growth in either the US or the UK economies from 2000 on. The GDP numbers may be higher but they have been driven only by borrowed money.”

Mr Rushbrook is so convinced that the developed economies’ addiction to debt will spark a “return to reality” he has been managing Personal Assets ultra-defensively for the best part of a decade.

Today the investment trust has about 40 per cent of its shareholders’ funds in cash. The trust also uses FTSE 100 futures to manage its exposure to what Mr Rushbrook sees as the “bear market rallies” that have occurred, for example since mid-June.

Mr Rushbrook and investment colleague Robin Angus believe distortions in financial markets were sparked by the decision of Alan Greenspan, the former Federal Reserve chairman, to slash US interest rates from 6.5 per cent in 2000 to 1 per cent and then to hold them there for a year. “Most investors, now thoroughly used to cheap money, are falling over each other to settle for much, much lower returns than they did before, in exchange for taking on higher and higher risks.”

Launched in 1983, Personal Assets Trust was reinvented when Mr Rushbrook took over as its manager. It was invested in a hotchpotch of high-risk areas including unlisted securities, venture capital and oil and gas partnerships that were not to Mr Rushbrook’s taste.

“The fundamental change I wanted to implement was based on the fact that, if you’re wealthy, you’re not really concerned with multiplying your wealth, you’re more concerned with preserving it,” says Mr Rushbrook, who has £14m of family money tied up in the trust.

He expects equities to provide a higher return over the longer term than any other investment available to private individuals but says risk and reward have to be balanced.

“Preservation of capital is key to Personal Assets strategy. Making capital grow — while important and desirable — takes second place to this.”

After clearing out the portfolio in 1990-91, Mr Rushbrook reinvested the trust — which then had assets of £5m– in large caps, which at the time were embarking on an extended rally that lasted for most of the 1990s.

Today about 60 per cent of the trust remains invested in equities and its biggest holdings include Royal Dutch Shell, BP, Royal Bank of Scotland, HBOS, Barclays, BT, GlaxoSmithKline and Scottish & Newcastle. That exposure seems high given Mr Rushbrook’s bearish outlook. He says: “Our view is let’s simply be a little cautious. We’ve been content to take 60 per cent of these enormous returns but we’re aware they may be unsustainable.

“Our view is also that the US banking system simply cannot allow a 25 per cent correction – neither can the UK banking system. They can avoid that by simply creating more credit – which is what they’re doing.”

Over the longer term, the unorthodox investment approach has paid off handsomely for Personal Assets’ investors. Under Mr Rushbrook’s management the trust’s share price grew by 620 per cent in the 16 years to August 31 2006. The FTSE-All Share grew by 203 per cent over that period.

But although the trust has outperformed the index by 20 per cent since 2000, the defensive approach has produced weaker returns during the stock market rebound of the past three years.

In the three years to October 2006, the trust’s share price grew by 31.1 per cent against 62.5 per cent for the index, and in in the year to October, its share price grew by just 9.5 per cent, against 20.1 per cent for the index.

However, this does not particularly worry Mr Rushbrook. He is more concerned that his investors should be well insulated in the event of what he sees as a probable financial crash. “We don’t have to sell anything in order to increase our liquidity. What we would do is sell our FTSE 100 futures, in effect removing our FTSE 100 future cover.”